Is it a good idea to take out your CPP early and invest it?

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Canadians are urged to delay receiving their Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) benefits until age 70 to receive a larger monthly income in their retirement years. Yet, research shows less than 1 per cent do.

Many choose to take the funds sooner either because they need the money, worry they won’t live very long, or want to invest it – strategies advisors say could be best in certain circumstances.

“It’s not always about the math, but also about the individual, their needs and risk tolerance,” says Julia Chung, chief executive officer, partner and senior financial planner at fee-only firm Spring Planning Inc. in Vancouver.

“There’s also the risk of delaying it and never receiving it [if you pass away].”

Taking CPP/QPP at age 60 – the earliest possible – has been the most popular option in recent years despite the many arguments in favour of waiting, according to a 2020 report by Toronto Metropolitan University’s National Institute on Ageing and the FP Canada Research Foundation.

The average Canadian who takes CPP/QPP at age 60 instead of waiting until age 70 can lose more than $100,000 of “secure, worry-free retirement income that lasts for life and keeps up with inflation,” the report states.

It urges the financial services industry to educate Canadians better on the benefits of delaying, citing a government survey showing that about two-thirds of Canadians don’t realize deferral is an option.

Strategies if taking CPP/QPP early

While Ms. Chung advocates delaying CPP/QPP when possible, she says some Canadians believe they can make better use of the funds by taking them sooner.

“You might be someone who wants to take CPP early, invest the proceeds and is comfortable with the associated risks,” Ms. Chung says.

An example could be someone with a defined-benefit pension plan and few or no outside investments looking to use their CPP/QPP benefits to sock away money for their heirs.

“Some people may be really concerned about there not being this pot of money, and they want to leave some kind of legacy,” she says.

People who take their CPP/QPP early to invest the funds should also consider the fees, whether it’s done through an advisor or do-it-yourself platform, adds Dami Gittens, senior wealth planning associate at Nicola Wealth Management Ltd. in Vancouver.

To make it worthwhile, she notes the return on the investment would have to be greater over time than the guaranteed increase in income being received from the government if you wait. Investors would also need to be comfortable with the market risk.

“If you’re the type of person who gets worried by the ups and downs of the stock market, then it probably makes more sense for you to delay,” she says.

There’s also an option to take the CPP/QPP early and contribute the funds to a registered retirement savings plan (RRSP), Ms. Gittens says.

“It could neutralize the effect on your taxable income, which means you essentially delay or defer paying taxes until you start to draw income from your RRSP, which you don’t need to do until age 72,” she says, but notes it’s a specific strategy that would only work for people who are still employed, or who have retired and still have RRSP contribution room.

“For some people, it would work if we can see that they will be in a lower tax bracket later on,” she adds.

Missing out on guaranteed income

Each year someone defers CPP/QPP after 65, payments are boosted by 8.4 per cent, which means starting at the age of 70 is 42 per cent larger than at 65. That percentage could be higher if wages rise faster than price inflation, according to retirement expert Frederick Vettese, former chief actuary of Morneau Shepell Ltd.

Mr. Vettese says Canadians who defer CPP to age 70 receive a guaranteed net return of about 6 per cent a year based on actuarial calculations that include mortality and interest assumptions.

“If you take CPP at 65 or sooner, you’re basically passing up a 6-per-cent guaranteed return,” he says.

Mr. Vettese notes that CPP/QPP benefits are also indexed to inflation, which Canadians are paying closer attention to these days.

“The new reason for deferring is that you also get inflation protection on the bigger CPP pension amount,” he says.

Jamie Golombek, managing director, tax and estate planning at CIBC Private Wealth in Toronto, urges Canadians not to take CPP/QPP early unless they really need the money or have a shortened life expectancy.

He also believes taking the benefit earlier than age 70 and investing it yourself may be too risky for some, especially compared to the CPP/QPP, which is guaranteed income.

“The fundamental question is, do you really want to do this all alone?” Mr. Golombek says. “In other words, do you really want to be in charge of that investment? I guess it depends on how risk-averse you are.”

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Editor’s note: This article has been updated to clarify that the CPP and QPP are funded by the contributions of employees, employers and self-employed people as well as the revenue earned on CPP investments. For more information please visit: https://www.canada.ca/en/employment-social-development/programs/pension-plan.html .

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